How the IRS Scandal Might Benefit Small Business

A few weeks ago, the Internal Revenue Service (IRS) admitted that some of its employees improperly subjected to disproportionate scrutiny to conservative groups seeking to set up non-profit status.

While you might think that the scandal has little to do with small business, in the strange world of Washington — where everything influences everything else — the scandal has the potential to benefit small business owners in several ways.

The biggest potential gain for small business owners lies in the ammunition the scandal provides Republicans in their effort to challenge the Affordable Care Act (ACA). While the GOP has thus far failed to stop the new health care law, the scandal gives Republicans the opportunity to hinder the tax agency’s efforts to enforce the law. By hammering away at the theme that the IRS cannot be trusted, the GOP may be able deny the tax authority the funds it needs to administer the new law.

That, it turns out, will benefit small business owners, who tend to oppose the ACA. A Gallup Survey of small business owners conducted in April revealed that 48 percent think the new law will be bad for business, while only 9 percent think it will be good, and 39 percent think it will have no impact.

The cost of the new law, and the benefits of any reduced enforceability, will fall largely on small businesses because almost all big companies provide employee health insurance. In 2012, the Kaiser Family Foundation found that 98 percent of businesses with 200 or more employees offered employee health insurance, but only 61 percent of companies with fewer than 200 employees did.

The scandal also adds to the credibility of the Tea Party groups, who are major supporters of small business. Conservative organizations claimed months ago that they had been singled out for unfair treatment, but many were skeptical of their claims. Being the victim of the IRS has boosted the favorability of the Tea Party movement, a CNN/ORC International survey suggests. Between the March poll (before the news of the scandal broke) and the latest poll, the Tea Party’s favorability increased nine percentage points, CNN reports.

If the Tea Party can capitalize on the scandal to garner support in the mid-term elections, their electoral success should work to the advantage of small business owners. Tea Party supporters are more likely than other voters to believe that cutting taxes on small business is a good approach to job creation, a 2010 Winston Group survey revealed. Moreover, nearly two-thirds of small business owners believe in the Tea Party idea that the government is too expansive, as compared to less than half of all Americans, A Wall Street Journal/NBC poll showed.

Then there’s the effect of the scandal on IRS audits themselves. The tax agency might need to cut back on audits in the wake of the scandal, as it seeks to rebuild its trust with the American people. That would be a welcome respite for successful small business owners who have seen an increase in the rate of IRS examinations in recent years. According to the IRS’s annual data book, the audit rate for business returns of between $200,000 and $1 million jumped from 2.8 percent in 2008 to 3.7 percent in 2012.

Perhaps a corollary of the proposition that “politics makes strange bedfellows” should be: “politics creates unexpected linkages.”

Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.